so being the newb i am, i’m realizing that assumable mortgages are a thing of the past…
are there any comparables to that?
There are still some assumable mortgages, just not the common. The comparable is taking over a property subject-2. The difference is with an assumable, the bank is involved and giving their permission, with a subject-2 the bank has the right to call the loan due (but probably never will as long as payments or kept current).
Any loan can be assumable if you use a land trust, which is exempt from the DOSC.
TrustPro, can you expand on your comment. While the DOSC is exempted from living trust transfers (land trust included) doesn’t the seller actually violate the DOSC when he transfers his beneficial interest in the trust to the new property owner?
The real issue with the land trust and DOSC is the transfer of the right to occupy the unit. Transfers that involve changing the right to occupy the property are not specifically excluded.
box2good,
It is not the title to the property that is assumable but the loan on the property that is/is not assumable. If the note/loan is assumable it will say as much in the promissory note paperwork.
BLL:
The real issue with the land trust and DOSC is the transfer of the right to occupy the unit. Transfers that involve changing the right to occupy the property are not specifically excluded.
The Federal Home Loan Bank Board, which was disbanded in 1989 and replaced by the Office of Thrift Supervision, takes the absurd position that the Act only applies to owner-occupied homes. [See 12 C.F.R. 591.] However, the clear language of Garn Act specifically states that it applies to residential one-to-four family homes. There is no mention that it must be "owner-occupied.". The law is very specific. The owner has the right to lease the property for less than three years and without an option. That preserves the exemption.
what is the dosc?
It stands for “Due on sale clause”. It means that the lender has the right to call the loan due payable in full if the title of the property is transfered.
Below is the wording of the Garn/St.Germain Act which exempts living trust transfers. It specifies 1-4 family homes and requires that the borrower remain a beneficiary of the trust. It does not exempt the DOSC if the trust transfers the right of occupancy. Language regarding rights to lease the property for less than 3-years without option is contained in a seperate section which does not appear related to the living trust exemption. IMO that is how I read the legislation.
TITLE 12 > CHAPTER 13 > § 1701j–3
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§ 1701j–3. Preemption of due-on-sale prohibitions
(d) Exemption of specified transfers or dispositions
With respect to a real property loan secured by a lien on residential real property containing less than five dwelling units, including a lien on the stock allocated to a dwelling unit in a cooperative housing corporation, or on a residential manufactured home, a lender may not exercise its option pursuant to a due-on-sale clause upon—
(4) the granting of a leasehold interest of three years or less not containing an option to purchase;
(8) a transfer into an inter vivos trust in which the borrower is and remains a beneficiary and which does not relate to a transfer of rights of occupancy in the property
You are correct. It does not exempt the DOSC if the trust transfers the right of occupancy. However, the trust document itself does not transfer the right of occupancy, hence the exemption is preserved. Language re rights to lease the property are in the same section and apply DIRECTLY to the DOSC exemption:
(d) Exemption of specified transfers or dispositions
With respect to a real property loan secured by a lien on residential real property containing less than five dwelling units, including a lien on the stock allocated to a dwelling unit in a cooperative housing corporation, or on a residential manufactured home, a lender may not exercise its option pursuant to a due-on-sale clause upon—
(1) the creation of a lien or other encumbrance subordinate to the lender’s security instrument which does not relate to a transfer of rights of occupancy in the property;
(2) the creation of a purchase money security interest for household appliances;
(3) a transfer by devise, descent, or operation of law on the death of a joint tenant or tenant by the entirety;
b the granting of a leasehold interest of three years or less not containing an option to purchase;[/b]
(5) a transfer to a relative resulting from the death of a borrower;
(6) a transfer where the spouse or children of the borrower become an owner of the property;
(7) a transfer resulting from a decree of a dissolution of marriage, legal separation agreement, or from an incidental property settlement agreement, by which the spouse of the borrower becomes an owner of the property;
b a transfer into an inter vivos trust in which the borrower is and remains a beneficiary and which does not relate to a transfer of rights of occupancy in the property;[/b] or
(9) any other transfer or disposition described in regulations prescribed by the Federal Home Loan Bank Board.
Translated, this allows a homeowner to transfer his property to a inter vivos trust and to lease it for up to three years without an option, retaining at least a 10% beneficial interest. If he follows these guidelines, there is no DOSC violation.
I would say this is the position the judge will take in any dispute. For the investor to prevail, the judge must convinced the OTS is wrong. Keep in mind judges don’t follow the law. They twist it to get the outcome they want and especially like to defer to the opinion of a regulatory authority when they aren’t sure. My personal opinion is Congress intended the law to protect onwer-occupants, not investors or business people, but there will be no clear answer until there is some case law on the subject. Given that the DOSC is rarely enforced, I don’t think we will ever get one.
The law allows the owner to lease the property up to 3 years and without an option. I find a tenant and retain at least a 10% int. in the trust. I make my tenant a co-beneficiary of the trust. He IS an owner and occupies the property. In fact, the IRS allows him the mtg interest and property tax writeoffs. It’s not complicated.